Fed has room for more rate increases in 2017

Singapore - The Federal Reserve has room for two more rate increases this year, as the economy seems “reasonably close” to full employment and is likely to gather pace, former Federal Reserve Bank of Atlanta President Dennis Lockhart said.

“The committee is pretty solidly optimistic about the outlook for at least the medium term, and that would be the continuation of a moderate pace of growth,” Lockhart said in an interview with Bloomberg Television’s Yvonne Man in Hong Kong on Monday. “It’s appropriate to begin to remove a little bit of the ultra-accommodation.”

The Fed on March 15 raised its target for the benchmark federal funds rate by a quarter point to 0.75% to 1% and released quarterly forecasts showing that officials expect to hike twice more this year, according to their median estimate.

Speaking at the sidelines of the Credit Suisse Asian Investment Conference in Hong Kong, Lockhart said the Fed is not behind the curve, and he would have supported the rate increase earlier this month. With the unemployment rate at 4.7%, the economy is “reasonably close” to full employment, he said.

Still, policy makers would most probably refrain from aggressive tightening with US interest rates likely to be low by historical standards for some time, he said.

Upbeat on growth

While there are indications that US first-quarter economic growth may be “quite low” at about 1%, the pattern of recent years may be repeated with accelerated expansion seen in the second quarter and later in the year, said Lockhart, who retired at the end of February.

In a later speech, Lockhart said he’s upbeat on the US economy maintaining a "modest" pace of growth of about 2% though he cautioned that President Donald Trump’s economic policies may not lead to sustainable growth without addressing the wider challenges.

Lockhart said “there’s not a great deal” that the Fed’s monetary policy can do to enhance productivity. Instead, policy makers need to tackle structural headwinds such as demographics and productivity.

As the Fed tightens, they will also begin a "natural but slow" shrinking of the balance sheet with the final size probably between $1trn and $2trn, he said in a response to a question.

"The gravity is toward an all-treasury balance sheet," he said.

Glenn Hubbard, a top Republican economist, said at the same conference that monetary policy is also not the appropriate tool to help discouraged job seekers return to the workforce.

Hubbard, who headed the Council of Economic Advisers under George W. Bush and is the dean of Columbia University’s business school in New York, is seen by some as a possible candidate to take over should the Trump decide not to nominate Janet Yellen for another four-year term as chair when her current one expires in February 2018.

“What ails the economy has more to do with supply side structural issues than things the Fed can fix,” Hubbard said.

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